Next we examine the properties of quarterly reports to determine whether the effects are larger in the interim quarters relative to the fourth quarter, when an increased auditor presence might substitute for improved internal controls. Consistent with this hypothesis, we find that the improvements in the validity of the loan loss provision, and the increase in earnings persistence and predictability of future cash flows, are all larger in the first three quarters than in the fourth quarter.
Taken together, these results suggest that the FDICIA-mandated internal control provisions resulted in the average bank exercising less reporting dis本文来自优.文~论^文·网原文请找腾讯752018766cretion. This reduced discretion creates a greater association between current reported accrual numbers and future cash flow numbers. However, as a result of this improved association, the reported accrual numbers also became less conservative. Thus, the conclusion about how this regulation affected the quality of financial reports depends on on
论文网http://www.youerw.com/
论文范文http://www.chuibin.com/ e’s definition of quality. Our results suggest improved reporting quality based on the FASB’s argument in Statements of Financial Accounting Concepts (SFAC) 2 that “conservatism in financial reporting [i.e.] any attempt to understate results consistently is likely to raise questions about the reliability and integrity of the information about those results.” However,Watts’ (2003) argument that the “attempts to ban conservatism are likely to fail and produce unintended consequences” suggest that the changes in financial reporting characteristics that we document may indicate a deterioration, rather than an improvement, in financial reporting quality.
We believe our results can inform the debate between regulators and practitioners over the merits of internal controls regulation. Our focus on banks is particularly relevant to the renewed debate over this type of regulation arising from the recent financial crisis. In addition, our study can be used to draw inferences about the implications of similar changes in internal control regulations outside of the banking industry, in particular for regulations that are also based on the COSO framework, such as the SOX internal control provisions. Thus, we believe that our results could have broad implications for understanding the effects of internal control regulations.
Section 2 provides the background for our study. We discuss hypotheses in Section 3; sample selection in Section 4 and research design in Section 5. We present our results in Section 6 and discuss our sensitivity test results in section 7. We conclude in Section 8.
2. Background
2.1 Development of Internal Control Regulation in the U.S.
2.1.1 COSO
COSO is a private-sector initiative begun in 1985 to address fundamental causes of financial reporting scandals. Reliability of financial reporting is one of the three objectives of the internal control process in the COSO framework. The COSO Report provides guidelines for assessing effective control system attributes, and states that:internal control is broadly defined as a process, affected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding achievement of effectiveness and efficiency of operations, reliable financial reporting, and compliance with applicable laws and regulations3.
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